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spk06: Good morning and welcome to the Zurn Water Solutions Corporation third quarter 2021 earnings results conference call with Todd Adams, Chairman and Chief Executive Officer, Mark Peterson, Senior Vice President and Chief Financial Officer, and Dave Folley, Vice President of Investor Relations for Zurn Water Solutions. This call is being recorded and will be available on replay for a period of two weeks. The phone numbers for the replay can be found in the earnings release the company filed and 8K with the FCC yesterday, October 26. At this time, for opening remarks and introduction, I'll turn the call over to Mark Peterson.
spk04: Thank you. Good morning, everyone. Before we get started today, we're pleased to announce that Dave Folley will be assuming the day-to-day investor relations responsibilities as of this earnings call. Many of you have already had a chance to work with Dave over the past six months. He's been instrumental in assisting us with the investor relations during that time. Dave has been with the company for the past nine years, working in several financial roles, and has been our corporate controller for the past four and a half years. Before I turn the call over to Dave for some opening comments, I just want to touch on the RMT transaction that closed on October 4th. Given the timing of the close, our third quarter results include the PMC segment. Starting with the fourth quarter of 2021, the PMC segment will be reported as discontinued operations. We will provide high-level comments on P&C's financial results this quarter, but we ask that you hold any questions you may have on the P&C segment for legal recs for its earnings call next week on Tuesday, November 2nd. And I'll turn the call over to Dave Foley.
spk05: Thanks, Mark. Good morning, everyone. I'd like to remind you that this call contains certain forward-looking statements that are subject to the safe harbor language contained in the press release that we issued yesterday afternoon, as well as in our MPC filings. In addition, some comparisons will refer to non-GAAP measures.
spk04: Our earnings release and FCC filings contain additional information about these non-GAAP measures, why we use them, and why we believe they are helpful to investors, and contain certain reconciliations to the corresponding GAAP data.
spk05: Consistent with prior quarters, we will speak to certain non-GAAP metrics as we feel they provide a better understanding of our operating results. These measures are not a substitute for GAAP, and we encourage you to review the GAAP information in our earnings release and in our SEC filings. With that, I'll turn the call over to Todd Adams, Chairman and CEO of Zern Water Solutions. Thanks, Dave. Congratulations, and good morning, everyone. Hopefully, you all had a chance to read through the release last night and see the consolidated Rexnord numbers for the last time, and as Mark covered in his comments, we'll use this call to essentially discover Zern Water Solutions results and leave the PMC results to the Regal Rexnord team when they report next week. First of all, this is truly a milestone quarter for us. We got the RMT transaction done with the new Regal Rexnord in only about seven and a half months, a testament to the collaboration between the two companies and simply outstanding effort by everyone and our advisors on both sides. I want to thank our team in particular for everything they've done to facilitate the separation. When you go through one of these things, it obviously touches a lot of things that need to get sorted pretty quickly. Any trust, the SEC, the IRS, contracts, licenses, IT, tax benefits, you name it. And from our side, it's really gratifying to go through all of that and not miss a beat. Getting everything done for day one standalone while continuing to execute at a high level is really a testament to the team and talent we've assembled here. What's even more important is that we started October 1st with all of that behind us and focused on the future. The transaction is a terrific outcome for both companies and shareholders, and we're excited about what it means for Zern Water Solutions to be standalone, and obviously rooting for the new Regal Rexnord team's success, and believe they have a really bright future moving forward. So we'll get on to the ZWS part of the program. From a top-line perspective, we grew 15% in the quarter, 5% on a core basis, and that's on top of the 5% core growth we delivered last year. And frankly, it should have been a little bit more. I'm not going to pull out a harmonica and sing the supply chain blues because our teams have done an incredible job of managing through the compounding impact of tariffs, supply and labor constraints, and lately the logistics knot the world's found itself in. The deep expertise and experience we have in managing a complex supply chain has kept us ahead of the price-cost equation for a long time while keeping industry best lead times. It also has allowed us to disproportionately invest in growth versus investing in capacity and things like maintenance capex. To get a little specific on the logistics topic, we had a plan to import almost 900 containers over the course of the quarter, and about 50 of them were late. A handful of those were delayed by COVID shutdowns at ports leaving China and other parts of Southeast Asia. Another 25 were late because of delays getting picked up at our suppliers due to either a shortage of trailers or drivers. And the rest were a function of using a break-bulk transport solution that simply got delayed at various ports in the U.S. That's the bad news. If half of these break our way, we're looking at core growth of 9 to 10 percent. The good news is it's not a labor shortage at CERN. It's not a product supply-based performance issue. It's not a component availability issue. It's a lot like we talked about last quarter. It's the compounding impact of a whole bunch of things colliding creating a topic that will be the most talked about thing on earnings calls this season, supply chain challenges. But in our case, it's really a few discrete transportation delays. To us, it feels like the third quarter was or is close to the inflection point of this transportation and logistics not the world finds itself in. And as we start our fourth quarter, it feels like we're in great shape. Essentially, everything that needed to leave a port at this point has left. Everything that's here is winding its way out of the various ports and warehouses. And with one month of the fourth quarter in the bank, we're off to a good start. And as we said in the release, taken as a whole, the second half will end up sort of as we'd expected 90 days ago. As it relates to ZWS profitability, we delivered margins of 26.5% at the high end of our expectations despite the lower shipments. Hopefully it's pretty clear that we continue to execute well on the price-cost equation But I want to make a comment or two to give you a better feel on why our margin profile is so strong and sustainable and that it's actually a whole lot more than just pushing price increases into the marketplace. A huge competitive advantage we have relative to the people we compete with is the relative shares we have across the broadest portfolio of products in the industry, which is an extraordinarily difficult thing to replicate. And the reason that's important is that environments that we're in, and frankly, we continue to be in, products that work better together, that are easier to install, faster to install, and fundamentally save labor and costs for the building owner and the mechanical contractor are going to win. It's a big advantage to us, and even more so as we continue to expand our portfolio. And second, while we typically lead the market with respect to price, it's also about continually doing a better job on product design and innovations. I won't get too specific, but there's a particular category where we design and develop a patented product that weighs a quarter of the weight of our competitors. Suffice it to say, it's a brass valve. So we don't always have an advantage because of our portfolio, but imagine in an example, we're selling a product at a market price, but our material cost on the product is 75% less, not to mention our freight costs are lower. So when you understand these types of examples, it becomes clear as to why our margins are so superior to our competitors. If we can move to page four. The future for ZWS on a standalone basis is exciting. That's a big part of the reason why we decided to separate PMC when we did. The incubation time for a number of breakthroughs were really beginning to take root. And as we take a step back and look at the next three to five years, we see incredible runway for growth, both organically and also from an M&A perspective. The idea of being a standalone pure plain water business levered to a number of water and sustainability megatrends is something we've been laser-focused on for a while. And we feel like we're very early in the journey of capitalizing opportunities here. And that's before we dial in what an infrastructure bill might do for our business. Sitting here today, I would say we've never had the number of organic opportunities in front of us that we see today. The one we've discussed for the last year has been the touchless hygienic opportunity that we've branded BrightShield. This continues to have an enormous medium to long-term upside, not just for new construction, but the massive available retrofit market that we've really only entered in the last year. But it's not just that. It's the fact that we've effectively reinvented our drain business the past several years with patented solutions that perform better, reduce costs for installers, and give us opportunities to rewrite specifications around these solutions. We're also leading the industry in developing products that can be used for pre-publication, or off-site construction that the industry is leveraging to combat lower levels of skilled labor required to meet the strong demand for new construction. We've leveraged our product portfolio to enter the adjacent fire protection market, site works market, and pretreatment markets. These are all share gain opportunities for us that we weren't even participating in just three years ago. E-commerce has allowed us to reach a whole new subset of customers, and we're excited about the JANFAN channel and believe it has incredible growth potential for us in the coming years. And finally, it's not just only about extracting the cost synergies from acquisitions we've made, but capitalizing on the growth from acquisitions under the Zurn leadership positions around specification, content per square foot, and lean construction trends. The bottom line is we see a clear path to double-digit growth next year, and are also optimistic that we'll see some M&A opportunities convert, setting up strong growth into 2023 and beyond. We're not going to get ahead of ourselves at this point, but it's clear to me that GWS can be a much larger company with a consistent financial profile while continuing to build out our business, very much focused on the types of things we do today. If we can get to page five. So now that we're a pure play water business, our ESG profile and impact is both more visible and heightened. We believe that as we move forward, it won't just be about providing products that save the world billions of gallons of water or keep the potable water supply safe inside buildings or creating safe and hygienic spaces inside public and private spaces. It'll also be about doing it the right way in an inclusive way. And we're up for the challenges that taking a leadership role demand. I also think it's important for everyone to know that we've been at this for a while, and we're very much looking forward to getting out and meeting with investors on the topic, and we'll be pleased to share our progress as we publish our upcoming 2021 Corporate Social Responsibility Report. Before I turn it over to Mark, if you could just turn to page six. As some of you on this call may remember, a couple of years ago, we laid out a relatively comprehensive capital allocation strategy for Rexnord. that was grounded in the reality of a relatively undervalued multi-industry business with strong deleveraging characteristics. But it had become public from a private equity-led IPO that left us with leverage north of four times. We had finally achieved the financial profile to begin to return money to shareholders in the form of a reasonable dividend, a regular share repurchase program, and a priority around water-related acquisitions. In the case of ZWS, while it's a very different dynamic, our capital allocation strategy is something we wanted to clearly communicate to investors as we start standalone. First, ZWS is a differentiated growth company. With a mid-single-digit core growth rate over a decade, an exceptional margin profile, and equally strong deleveraging characteristics as the old Rexnord. One really good example of this is Over the past 15 years, CapEx has been about 1% of sales. Next, we're starting life with leverage of only two times and would expect to maintain a modest leverage profile between two and three times. Could drift lower at times, but in general, expect that to be our targeted range. You may have also seen that last week our Board declared an initial dividend of $0.0325 or $0.12 annually. And while it's modest to start, It's something we think we can selectively and comfortably increase over time as we grow. And finally, with respect to acquisitions, we believe we have a deep funnel of opportunities that fit our return criteria that we can do with our cash flow that only enhance our long-term growth rates and returns opportunities should they become actionable from our proprietary funnel. So with that, I'll turn it over to Mark to walk through some additional details on our performance and provide some color on our Q4 outlook.
spk02: Thanks, Todd. Please turn to slide number seven.
spk04: On a year-over-year basis, our third quarter consolidated sales increased 13% to $557 million. The growth was driven by a 100 basis point benefit from foreign currency translation, a 400 basis point positive contribution from our Hadrian acquisition and our water management platform, partially offset by a small divestiture in the PMC platform that reduced our total sales by approximately 100 basis points, and finally, core sales growth of 9%. Turning to profitability, our adjusted EBITDA increased 18% from the prior year third quarter to $128 million, and our adjusted EBITDA margin expanded 100 basis points year-over-year to 23%. The incremental sales volume and the realization of our scope of three and other productivity actions drove the year-over-year improvement in our margin this quarter, despite the headwinds we faced from the temporary cost reduction action we took last year due to the COVID-19 pandemic. We'll turn to slide eight, and we'll review our platform results. At the platform level, water management sales rose 15% from the prior year September quarter, as the Adrian acquisition contributed nine points of growth, positive foreign currency translation contributed one point, and the core business increased 5%. While sales were adversely impacted by approximately 400 to 500 basis points due to some temporary transportation delays that Todd touched on earlier, the demand in Zern remained strong in the quarter as orders increased high single digits over the prior year quarter. With respect to profitability, our water management platform delivered a 9% increase in adjusted EBITDA over the prior year as margins were in line with our expectations at 26.5% in the quarter, inclusive of our continued investment in growth. Year-over-year margin contribution was impacted by the COVID-19-related temporary cost reduction actions we took in the prior year's third quarter, as well as the temporary mixed impact in the Adrian acquisition. Excluding those two items, margins in the core business expanded year-over-year. Turning to PMC, sales increased 11% and includes a 100 basis point benefit from foreign currency translation, a 200 basis point reduction from the small 2020 fourth quarter divestiture in China, and a core sales increase of 12%. The core sales increase was driven by a 14% increase in non-aerospace end markets, coupled with aerospace sales that were flat year-over-year. Demand trends remained solid, as core orders in non-aerospace end markets increased nearly 30% from the prior year, and year-over-year orders growth grew over 100% in aerospace end markets. And the book-to-go ratio was above one for the quarter. P&T's adjusted EBITDA margin expanded 250 basis points year-over-year to 23.5%, as the benefits from the sales growth scope for actions, and other structural cost reduction initiatives, more than offset the year-over-year margin headwinds in the temporary cost reduction actions we took last year due to the COVID-19 pandemic.
spk02: So please turn to slide nine, and I'll touch on some of the cash flow and balance sheet highlights.
spk04: With a strong free cash flow generation in the quarter and growth in adjusted EBITDA, our net debt leverage was reduced to 1.5 times for the calendar year. In conjunction with the close of the RMT transaction, we paid off the $500 million notes, including the May cold fee, and the $625 million term loan, both of which run our balance sheet as of September 30th. Our new capital structure that went into place with the close of the transaction includes a $550 million term loan B with a $200 million revolver that is currently undrawn. Our new seven-year term loan has an interest rate of 2.25%, with a 50 basis point library floor and pushes any debt maturities out to 2028 to 130 million of cash on the balance sheet. Please turn to slide 10. I'll make a few comments on our outlook for the fourth quarter, as well as some items that will help with fiscal year 22 modeling. For the fourth quarter of 2021, we are projecting total sales to increase year over year by a high teens percentage. With respect to margins, We expect our adjusted EBITDA margin to be between 24% and 24.5%, which excludes what we've historically referred to as corporate segment costs. We anticipate corporate costs in terms of adjusted EBITDA to be approximately $10 million in the quarter. We remain on track to reduce our corporate expenses to approximately $20 million on an annualized basis, again, in terms of adjusted EBITDA during the first quarter of 2022.
spk02: Before we open the call for questions, a few comments on our interest expense stock comp expense, depreciation and amortization, tax rate, and diluted shares outstanding.
spk04: We anticipate our interest expense for the December quarter to be approximately $5 million. Our non-cash stock compensation expense should be about $16 million, inclusive of a non-recurring accounting adjustment with a conversion of restaurant equity grants to zero equity grants as a result of the R&P transaction. and we anticipate our depreciation and amortization to come in around $8 million. Our tax rate on adjusted pre-tax earnings in the December quarter will be approximately 30%, and our diluted shares outstanding, again, updated to reflect the conversion of restaurant equity grants, concern equity grants, as a result of the RMT transaction, will be approximately 129 million shares in the quarter. Looking ahead to calendar year 22, We wanted to provide an update on several expenses now that the RMT transaction is complete. We expect calendar year 22 annual interest expense to be approximately $20 million, annual stock comp expense to be about $17 million, annual depreciation and amortization to come in around $18 million. We anticipate a tax rate on adjusted pre-tax earnings in the 26.5% to 27.5% range. The losing shares outstanding, again, updated to reflect the conversion of the rent-free equity grants to zero equity grants as a result of the RMT transaction, will be approximately 130 to 131 million shares. We will provide any additional guidance for fiscal year 22 on our next earnings call in February of 2022. With that, we'll open the call up for your questions.
spk06: Thank you. If you'd like to ask a question, please press star 1 on your telephone keypad. And our first question is from Brian Blair with Oppenheimer. Your line is open. Thanks. Good morning, guys.
spk01: Good morning, Brian. To quickly level set on Q4 core growth expectations, is low to mid-teens the right range if we account for two months or so incremental hedging contribution and kind of high single-digit range accounting for the delayed shipments from Q3?
spk04: Well, yeah, we talked about high teams all in. So think about the core and better that number is going to be, yes, you said in the low teams from a core growth standpoint in the fourth quarter, Brian. And there is a bit of a spillover, as we mentioned earlier, from some of the growth that we did in the third quarter that we're picking up in the early innings of the fourth quarter.
spk01: Okay, makes sense. And more importantly, something you could offer, quite a bit of carryover with the latter. Relative growth rates are a major product category. Is there any call-outs by key end market? It would be very helpful.
spk05: You know, it's an incredibly balanced view going forward. I mean, the combination of a reasonable market price actions that we've got in place already and then the contribution from some breakthroughs that I sort of tried to run through give us you know, I think both confidence and some headroom to get to that double-digit core growth rate for 2022. And that's, you know, it's been a while since I think we had sort of that sort of confidence in a forward look. We're not going to, we've got, you know, a few months to refine it and get to that point. But at this point, I think it's a pretty balanced view between market organic growth initiatives and and price that's already sort of behind us that will just carry over. And the combination of those three get us, you know, get us north of that 10%.
spk01: All good to hear. And maybe provide a little more detail on Hadrian integration. We know there are some constraints earlier this year that were outside your control that have efforts reaccelerated there. You know, what are run rates margins? We know that there's still, you know, a meaningful degree of dilution versus the core, which you said was up year on year, and any shift in confidence in terms of getting toward 20% over time?
spk05: It's incrementally better, Brian. I think, you know, the reality is, you know, the COVID shutdown impacted that business probably far more than many others. So the volume ramp is probably – nine months behind what we would have anticipated. That is beginning. We're starting to see that happen in the quarter. And I think we're making, you know, good headway on the actions required to get the margins toward that, you know, clean average or at least something with a two in front of it. I think 22 is going to be the big year for margin expansion for Hadrian. I think from a competitive standpoint, we feel really good about, you know, the progress we've made. We're starting to get traction with specifications and conversions, and so I would anticipate along with a better environment plus the opportunity to really dig in and get at it, 2022 will be the big year from a margin expansion.
spk01: Appreciate the detail. Thanks again, guys.
spk06: Our next question is from Jeff Hammond with KeyBank. Your line is open.
spk02: Hey, good morning, guys. Good morning, Jeff.
spk07: Just maybe on, you've talked about the business unit safety flow and hygienics. Maybe just speak, you know, how those are trending either in the order rates or in the revenues this quarter.
spk05: I would tell you that I think water safety and control grew the most. flow systems grew the next, and hygienic environmental finished third in the quarter. I think as my comments alluded, we still believe in the medium to long-term growth. I can tell you as a category, it's been slower this year than we would have anticipated. I think we're hearing that both from the wholesale community as well as some of the Competitive intelligence we've picked up, but we are starting to see it pick back up here in September and October. And so I think you had a rush, if you will, to get ready for some sort of reopening. And now that people are back in, you know, we're getting back to more of that steady conversion as opposed to this wave. And so I guess the good news is the opportunity is there, and I think we've outlined it as massively. I think the things we've put in place around the Janssen Channel, e-commerce, and BrightShield, you know, give us a lot of confidence that it's on the come. We're seeing traction with a number of opportunities. But in the meantime, you know, water safety control continues to take market share. And I think, you know, my comments on the drain line and being reinvented, you know, are giving us great growth and a nice trajectory. So that's how it works. sort of shake out into one, two, three for the quarter.
spk07: Okay. And then just on the hygienics, I know, you know, there's this kind of COVID-related opportunity with the education channel where they're getting allocated dollars. What are you seeing on that end in terms of capturing some of that, you know, that federal money?
spk05: Well, we think we're going to get it. I think if you follow the bouncing ball, the funds get allocated to schools and then the school boards prioritize. And so I think from an opportunity set, we know regionally who's got what, and then it's really about calling on them and helping with the conversion and then the priority towards providing a hygienic space inside of a school. But I think the way we've contemplated that growth is it probably comes a lot more in 22 And I think we're well positioned to capture a bunch of them.
spk07: Okay, great. And then just last one, you guys certainly have had a lot of balls up in the air and, you know, maybe been internally focused. Maybe just speak to, you know, M&A pipeline, you know, valuations, you know, your thoughts on getting something done, you know, into 22.
spk05: Well, you know, I think, as you know, you know, Everything we've done has sort of been on a proprietary basis, and so we're gonna stick with that for the time being, because it's worked. I think we feel good about some things converting between now and the first half of 22. Valuations, I think, deliver the kind of returns that we expect and anticipate. you know, without getting overly specific, you know, I think I'm pretty confident that we're going to have some things convert here. And, you know, they're right down the middle in terms of, you know, what we've been doing. And if you think about stainless terrains, and you think about World Dryer, and you think about Hadrian, and you think about Just, these were all sort of competitive forays into other people's pockets. And when you... You know, when we integrate them, take them to market, leverage the spec, leverage the pull-through, leverage the go-to-market, all of a sudden, you know, you begin to get people's attention on, you know, what we've been doing. And so it's really along those lines that I think we'll continue to do, you know, some M&A that will be impactful. And we'll comment on timing, but I think from a valuation standpoint, it seems pretty reasonable and, you know, confident we'll get some things done.
spk07: Okay. Congrats on the split test. Thanks.
spk05: Thanks, Jeff.
spk06: Our next question is from Joe Ritchie with Goldman Sachs. Your line is open.
spk01: Thanks, Zach. Good morning, everybody. Congrats. Morning, Joe. For what it's worth, I mean, I think if the supply chain issues continue into next quarter, opening up the earnings call with the harmonica would be kind of awesome.
spk05: So just my two cents.
spk03: It was contemplated, Joe, but we sent it against it.
spk05: So maybe getting back to the task at hand, yeah, You know, you guys mentioned that in the water management business that this quarter margins would have been up, the core business would have been up if not for some of these issues and obviously the dilution associated with Adrian. I'm just curious, just from like a pricing standpoint, are you guys running ahead of cost at this point? And when you contemplate 2022? Yeah, I think I would tell you at this point with what we've put in place today, we are running ahead. And I think the way we've thought about 22 is we continue to run modestly ahead, which is entirely consistent with, you know, the last 14 years of my experience with Zern. So I don't see a reason why we would fall behind. Okay, that's great to hear. And then, Todd, can you maybe elaborate a little bit more on this GainStand opportunity?
spk01: Is this, you know, gaining greater share of wallet with some of the larger kind of like industrial distributors?
spk05: Or how should we think about the opportunity and exactly, you know, what you're doing from a channel perspective to gain traffic? Yeah, I mean, there's a whole adjacent channel of people that, you know, go into commercial buildings and clean them and do various maintenance activities. we were basically, we never touched it. And so, you know, what we've done over the course of the last six months is sign up some partnerships to establish, you know, some reps that are out there calling on these and then partnering with local wholesalers to pull that through. And it's still early days, but this, you know, the number of, you know, hundred million dollar Janssen fan companies that are out there servicing all these local, you know, areas is huge. And so our ability to, you know, connect, provide what the opportunity of Bright Shield is, get them to go out and begin to call and sell on it with their customers, with our support, and then pulling it through by having, you know, local stocking positions in their local trade area.
spk02: and frankly also being able to help them schedule an install.
spk05: In fact, they want some outside help. We've got a partnership network of mechanical contractors that are doing that work for us. So it's early days. I think we started talking about it maybe six months ago. Ballast, the new construction, it's untapped because we've really never been in there. And I think the Bright Shield offering about creating a completely hygienic you know, space inside of a commercial building is a powerful value proposition and one that, you know, it's got a long tail. Yeah, that makes sense. One last one for you guys. And Dave, congrats on the removing the interim title. But there's been a lot of discussion from the investor based on when you guys would have potentially an investor day.
spk02: And so curious to hear any thoughts around timing. with the new business.
spk04: Yeah, Joe, we're going to use the fourth quarter to start doing some targeted marketing during this quarter. I think we're looking to the first half of next year for Investor Day. We'd really like to do something like that in person. I know the kind of situation we're all in right now, it doesn't look like that was going to happen this calendar year. So we're looking at the first half of next year when we have guidance out for 22 to have a full-blown investor day. But this quarter we will be doing a lot of target marketing with the new business. Okay, great. Thank you. Thanks.
spk02: Thank you, Mick. Thanks, Mick. Good morning. Good morning. So maybe we can talk a little bit about – certain supply chain. I know you have a design and assembly business, but most of your revenues are in North America, the vast majority of it.
spk05: I'm sort of curious how your supply chain sets up relative to that. How much would you say of your components are imported, and where are they normally imported from? What sort of regions? Well, for a whole bunch of competitive reasons, I don't think it makes a lot of sense to talk through that. But suffice it to say, a significant portion of our COGS is imported from places outside the United States. I will tell you that it's less than it was five years ago as we've done some level of onshoring to collapse lead times, to deal with the tariff issues. And so this... this balanced supply chain that we have today, you know, looks a whole lot different than it did, you know, three or four years ago. Because we had a conscious, we made a conscious decision to eliminate, you know, supply chain.
spk02: Different three years ago, it's much more balanced globally than it is today. But, you know, all in, you know,
spk05: I would tell you that, and you know this, it's very much a design, procure, assemble, test model. We leverage third parties to manufacture some of the goods, and we do the late point assembly modification as needed. But it's not as overweight China as you may infer or expect. Yeah, I mean, I wasn't necessarily thinking China. I was just sort of curious as to how that was set up, because I would presume that you'd have opportunity to acquire suppliers in other places as well, not just China. As we're thinking longer term here, though, given the learnings of the last couple of years, is it fair to say that you're going to continue to work towards localizing the supply chain, presuming that, again, your geographic revenue mix remains as it is today? I wouldn't say that. I think what we've done is really set up a global network of finding the highest quality suppliers at the best cost with the best lead times and done that with redundant suppliers, usually in different geographies to avoid some
spk02: sort of event, whether that be environmental or geopolitical or whatever the case may be.
spk05: And so I think we've got a relatively dispersed supply chain with redundant capabilities. And obviously some of that has included domestic suppliers. Suppliers in Wisconsin, suppliers in Texas, you pick it. I don't think you're going to see a sea change in that approach. I think we've steadily tried to, you know, create a redundant capacity for our supply base.
spk02: And I think we'll continue to do that. So I don't think there's anything materially different.
spk05: I don't think we're going to start buying suppliers or things like that. I think we're going to continue to do what we do. And if we see an area where we're not pleased with the quality or the performance, or we see an opportunity to improve our competitive position in lead times, you know, we can do that. So I think we're really happy with, you know, how our supply chain has performed for a very, very long time. I think this logistics, you know, sort of, I call it a knot, is somewhat unfortunate. But I don't think it changes our view on how we're going to invest and grow our business. Yep. Okay. Appreciate that. You know, on this logistics issue that you talked about, you know, the track record here for you is pretty clear that you've been very successful at pushing through raw material cost increases through pricing and offsetting that. But I'm kind of curious as to how these transportation or logistics costs work. Do you have pricing flexibility of any sort to be able to offset that? Or should we look at your margin performance in the quarter, in the fourth quarter, as sort of being inclusive of this headwind, meaning as things hopefully get better in 2022, that becomes accretive to incremental margin? Well, I think when we, you know, issue a price increase or take a price increase, we contemplate all sorts of, inflation, and so I would tell you that it's hard to say that because containers went from $5,000 to $20,000, we've perfectly dialed in a price increase to cover that. I think we've got some of it made, probably not all of it, so a nice way of saying I think you've got to look at the margins and just say it sort of is what it is. Maybe we're a little bit short, maybe we're a little bit ahead, but in general, I think our price increases are offsetting our cost inflation. And I think the other point is the things that I tried to talk about when we're actually designing, developing, and selling a product that weighs 75% less than our competitors, that's a big deal. And that's something that we can keep for a long period of time. And so we're pretty happy with our overall performance here. Disappointed you know, that a few didn't show up on time. But nonetheless, it's not just about covering all the cost inflations, it's about finding ways to work around that. And lastly for me, maybe just a reminder in terms of what the normal incremental margins for the water business would look like.
spk02: And again, you know, you talked about the fact that the margin expansion at Hadrian
spk05: and it's really going to kick into 2022, not to pin you to guidance, but how that might potentially help boost these incrementals as we look into next year.
spk04: Thank you. Yeah, historically in this platform, we've always targeted incrementals to review on that 30% range. In some quarters, it can be a little bit higher, a little bit lower, but you kind of dial in on average in that 30% range has been what we historically would look at, and that really shouldn't change going forward. You know, Adrian, as Todd mentioned, next year is a year where we will see margin expansion. Adrian, for sure, we've seen it sequentially as the year has progressed.
spk02: Not a huge, huge margin needle mover for us, but overall a contributor. Of course, next year we have some growth investments, you know,
spk04: heat up as well to push the share capture side of the equation.
spk02: But all in kind of just to go back and answer the question, if you think about, you know, this platform in that 30% range over an extended period of time is a very reasonable spot to be.
spk04: And that's with the growth investment that we need in the business to continue to take the share in our markets.
spk05: All right. Appreciate it. Thank you, guys.
spk04: Thank you for taking the call today, everyone.
spk05: We appreciate your interest in CERN and look forward to providing our next update when we announce our December quarter results in February of 2022. Have a good day.
spk06: Thank you, ladies and gentlemen. This concludes today's conference call and you may now disconnect.
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